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Challenges to Tax Office On Avoidance Determinations

November 2003

Part IVA of the Income Tax Assessment Act permits the Commissioner to determine that a taxpayer improperly engaged in a "scheme" to avoid tax. Such a "determination" allows the Commissioner to amend the tax assessment and impose hefty penalties for tax avoidance. A question has arisen in a number of recent court cases as to whether the Commissioner can lawfully issue an amended assessment to increase the tax liability of the taxpayer prior to making the "determination" that a scheme has existed.

In Fabry v FCT (3 October 2003), Justice Merkel of the Federal Court held that the Commissioner is entitled to issue Part IVA determinations, and accompanying amended assessments at any time.

Merkel J held that the issuing of an amended assessment did not necessarily have to increase or decrease the taxpayer’s taxable income and the Commissioner was expressly empowered to issue amended assessments "at any time". In reaching this conclusion, he also relied on Justices Hill and Carr’s judgement in the Puzey case (26 August 2003). Their Honours held that it is necessary to amend an assessment when making the determination, even when a taxpayer's taxable income and the tax payable remains the same.

However, the Fabry case did not clarify whether or not a Part IVA assessment can be made before the Part IVA "determination".

In another case, Sleight v FCT (26 August 2003), the taxpayer challenged the validity of Part IVA determinations. In particular, the taxpayer claimed that second and third determinations were made after the issue of the amended assessments. Justice Nicholson held that the making of the Determination is part of the process of making the assessment and not liable to challenge. However, the Sleight case might still not have resolved whether a Part IVA assessment can be made before the Part IVA "determination".

The door to a further challenge was previously opened in the earlier Federal Court decision of Hill J in the Binnetter case (7 July 2003), where Justice Hill ordered the Commissioner to give particulars of the "scheme" relied upon by the Commissioner as falling within Part IVA.

The judge ordered the Commissioner:

• to notify the taxpayer of the Part IVA determinations that the Commissioner sought to rely upon, and to identify whether any of the determinations were made in the alternative;
• to make available for inspection any documents that were before the ATO officer who made the determination(s) at the time that the determination was made; and
• to identify the steps alleged to comprise any scheme that the Commissioner seeks to rely upon.

The ATO’s own Practice Statement (PS 2000/10) outlines steps to be taken by the Tax Commissioner in Part IVA determinations and requires that determinations are to be made and evidenced in writing before the issue of either an assessment, alternative assessment or amended assessment.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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